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September 13, 2016 in 75-1.1 Exemptions by

Breaches of covenants not to compete as unfair and deceptive practices? The North Carolina Business Court weighs in

When does a breach of a covenant not to compete violate N.C. Gen. Stat. § 75-1.1? Is tortious interference a per se violation of section 75-1.1? Departing-employee cases often raise both questions, but the answer to each question remains unsettled.

The North Carolina Business Court weighed in on both of these questions in a recent decision. In Sandhills Home Care, L.L.C. v. Companion Home Care—Unimed, Inc., the court held that allegations that stated tortious-interference claims also stated a 75-1.1 claim. The court also held that a conspiracy to violate covenants not to compete qualifies as unfair and deceptive.

Sandhills accuses Companion of poaching employees and clients

The plaintiff, Sandhills Home Care, provided home-health-care services. Sandhills’s employees provided one-on-one care to clients in the clients’ homes.

Each of Sandhills’s employees entered into an employment agreement. Each employee agreed that, for a stated period of time, he or she:

  • Would not compete with Sandhills;
  • Would not solicit services to clients or prospective clients of Sandhills; and
  • Would not solicit, or attempt to solicit, other Sandhills employees to end their Sandhills employment.

The corporate defendant in the case, Companion Home Care, competed with Sandhills in the same geographic area. Two of the individual defendants were former Sandhills office managers who went to work for Companion. The managers had access to Sandhills’s confidential information, including which employees were serving which clients and the types of services that each employee provided.

Sandhills alleged that the office managers used this confidential information to conspire with Companion to solicit employees to leave Sandhills and work for Companion. Sandhills alleged that those employees, in turn, convinced their clients to switch to Companion.

In the wake of these events, Sandhills sued Companion, its president, the former office managers, and the employees who went to work for Companion. Sandhills alleged that the employees breached their employment agreements.

Sandhills also alleged that Companion encouraged the individual defendants to breach their employment contracts, allegedly in a “malicious and blatant attempt” to destroy Sandhills’s business. Based on this conduct, Sandhills alleged tortious interference and violations of section 75-1.1.

Companion, its president, and the two managers moved to dismiss. They argued that the employees’ covenants not to compete were unreasonable, so the employment agreements at issue were unenforceable.

Business Court Judge Gregory McGuire agreed that the parts of the covenants that barred the employees from competing with Sandhills were overly broad. On the other hand, the court decided that the restrictions against solicitation of Sandhills’s current clients, and against inducing employees to leave Sandhills, largely protected Sandhills’s legitimate interests. The court mostly upheld these non-solicitation and non-inducement provisions.

Having upheld most of the employment covenants, the court declined to dismiss the tortious-interference claims. The employment contracts, after all, were the key contracts with which Companion allegedly interfered.

The 75-1.1 claim survives dismissal

The court also declined to dismiss Sandhills’s 75-1.1 claim.

The court wrote: “Since [Sandhills] has adequately alleged that Companion tortiously interfered with [Sandhills’s] customer relationships and with its former employees’ restrictive covenants, Defendants’ motion to dismiss . . . must be rejected.”

This statement implies that tortious interference is a per se violation of section 75-1.1. That question remains unsettled in North Carolina, even after the North Carolina Supreme Court’s recent decision in Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC. The Business Court, however, silently resolved any doubts on this point in favor of Sandhills.

The court also wrote that the allegation that the defendants conspired to entice Sandhills employees to work for Companion and bring patients to Companion “supports an inference of unfair and deceptive behavior that offends public policy.” In this phrase, the court suggested that such a conspiracy—independent of its role as tortious interference—states more than one type of 75-1.1 claim.

The fact pattern that Sandhills alleged is relatively common in departing-employee cases. If litigants follow the decision in Sandhills, we can expect to see more allegations of conspiracies and allegations of tortious interference in these cases. Under the Business Court’s reasoning, these allegations can give life to a 75-1.1 claim.

Author: George Sanderson